mark-to-market

1. The revaluing of a financial instrument, security or derivative to its current market price instead of the book value or cost. A security underlying a futures contract should be marked-to-market to determine the cash flow requirements for a margin position.

2. An accounting requirement that the assets of an organization are reported at their fair value. Sometimes called 'fair-value accounting'. A requirement that was made law in the US in 1993 after the Savings and Loan crisis when banks used historical values or cost instead of recognizing the declining value of their assets, especially real estate assets. A requirement that may create problems when the market price for an asset or liability is difficult to determine, as when there are few, if any, buyers (as when there is a significant shortage of liquidity or credit). In such situations, the rule may be relaxed to avoid a firm having to use forced sale prices or prices that are artificially low when taking into account determinable cash flows. Thus, assets or liabilities for which there is an active market, a 'Level 1' assets or liabilities, should be marked-to-market. 'Level 2' assets or liabilities – assets or liabilities for which there is a no quoted prices nor an active market – can be 'marked-to-model' based on the best assessment of fair value based on prices for identical or similar assets or liabilities in the same or other markets. 'Level 3' assets or liabilities – assets or liabilities for which there is no market or any comparable value – are reported on the basis of the management's best assessment of value, using the best information available. In addition, it may be less essential to revalue assets that are not to be traded in the short term. However, the financial statement of a company should disclose the amount of the assets or liabilities in each of the above categories so that they reflect a true position of the balance sheet at the date of the accounts.

3. In the case of a mutual fund, the setting of the net asset value based on the current market price of the underlying investments. This is normally done on the basis of prices at the close of each trading day.

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